'Carbon bubble' poses serious threat to UK economy, MPs warn

Committee says government and Bank of England must not be complacent about the risks of overvaluing fossil fuel companies

Stock markets are inflating a "carbon bubble" by overvaluing companies that produce fossil fuels and greenhouse gases, and this poses a serious threat to the economy, an influential committee of UK MPs has warned.

The idea of a carbon bubble - meaning that the true costs of carbon dioxide in intensifying climate change are not taken into account in a company's stock market valuation - has been gaining currency in recent years, but this is the first time that MPs have addressed the question head-on.

Much of the world's fossil fuel resource will have to be left unburned if the world is to avoid dangerous levels of global warming, the environmental audit committee warned.

To avoid the carbon bubble, the report says the Bank of England's financial policy experts should take advice from the Committee on Climate Change to monitor the risks to financial stability - a controversial recommendation that is likely to ruffle feathers in the Treasury.

Equally as contentious is the committee's call for the government to support binding national renewable energy targets for European Union member states, a move that the coalition has strongly resisted, preferring instead to rely solely on an emissions reduction target.

Companies should also be forced by law to report on their greenhouse gas emissions and assess the risk this could pose to their future financial performance, the MPs urged.

The committee said there was a substantial gap between the investments that are being made to take carbon out of the economy - for instance by building more low-carbon power generation capacity - and the investments that will be needed if emissions reduction targets are to be met and global warming halted. Current investments in "green finance" only run to about half of the amount needed to meet emissions reduction targets.

Joan Walley, chair of the committee, said: "The government and Bank of England must not be complacent about the risks of carbon exposure in the world economy. Financial stability could be threatened if shares in fossil fuel companies turn out to be overvalued because the bulk of their oil, coal and gas reserves cannot be burnt without further destabilising the climate.

"The record-breaking extreme weather events causing chaos across the globe should be a wake-up call. The transition to a low-carbon economy will be much more painful if we wait until there is a climate crisis before recognising that more than half of the world's fossil fuel reserves will have to remain in the ground."

The committee will launch its report, entitled Green Finance, at a conference in the City of London on Thursday.

Christiana Figueres, executive secretary of the UN Framework Convention on Climate Change (UNFCCC), who was visiting businesses in London this week ahead of upcoming climate talks in Bonn, said companies had a "fiduciary duty" to their shareholders to move to a low-carbon economy, because of the effects of the carbon bubble.

"If corporations continue to invest in new fossil fuels, they are really in blatant breach of their fiduciary duty, as the science [of climate change] is abundantly clear," she said. "Understanding the science, the fact is that we have to move to low-carbon no matter what, with or without policy."

She said that the world had a choice between moving to a low-carbon economy through policies and through businesses playing a role in investing in green technologies, or being forced to move to a low-carbon world through runaway climate change. "We will move to a low-carbon world because nature will force us, or because policy will guide us. If we wait until nature forces us, the cost will be astronomical."

An international agreement on climate change incorporating a "credible and significant commitment to reduce emissions" globally, of the kind that the UNFCCC is working on, would be vital to ensuring that companies make the investments needed to transform the economy on to a low-carbon footing, the environmental audit committee said in its report.

Catherine McGuinness, deputy chair of policy and resources for the City of London, said: "Opportunities do not come much bigger than sustainable finance. The latest estimates are that by 2050 there will be over 9 billion people on the planet and the majority of these - 75% according to UN estimates - will live in cities. These cities will require sustainable water, energy, waste and transport solutions, and these solutions will require substantial investment."

She said green finance was an area in which the City could "truly demonstrate its social utility".

Green campaigners called on the government to heed the call from the MPs to step up green finance and action on climate change. David Powell, economic campaigner at Friends of the Earth, said: "This is yet another powerful report from expert MPs that damns the government's failure to transform our broken, polluting finance system. Unless the government learns to accept constructive criticism, it will continue to squander billions of pounds in investment that are critically needed to build the low-carbon future."